The following discussion and analysis should be read in conjunction with our
unaudited consolidated financial statements and the related notes thereto. The
management's discussion and analysis contains forward-looking statements, such
as statements of our plans, objectives, expectations, and intentions. Any
statements that are not statements of historical fact are forward-looking
statements. When used, the words "believe," "plan," "intend," "anticipate,"
"target," "estimate," "expect" and the like, and/or future tense or conditional
constructions ("will," "may," "could," "should," etc.), or similar expressions,
identify certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results or events to differ materially from those expressed or implied by the
forward-looking statements. Our actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of several factors. We do not undertake any obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of this Quarterly Report on Form 10-Q. The following discussion should
be read in conjunction with our audited financial statements and the related
notes that appear in our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on March 30, 2022.
Overview
Business Overview
Our primary product is the Blockchain Archive Server-a turn-key, off-the-shelf,
blockchain solution that works with virtually any hardware and software
combinations currently used in commerce, without the need to replace or
eliminate any part of the client's data security that is being utilized. The
Blockchain Archive Server encrypts, fragments, and distributes data across
thousands of secure nodes every day, which makes it virtually impossible for
hackers to compromise. Using blockchain technology, the Blockchain Archive
Server maintains a redundant, secure, and immutable backup of data. Redundant
backups and the blockchain work together to assure not only the physical
security of the database but also the integrity of the information held within.
Blockchain Archive Server protects client data from "ransomware"-malicious
software that infects your computer and displays messages demanding a fee to be
paid in order for your system to work again. Blockchain technology is a
leading-edge tool for data security, providing an added layer of security
against data loss due to all types of software specifically designed to disrupt,
damage, or gain unauthorized access to a computer system (i.e., malware).
Uniquely, the Blockchain Archive Server is a turn-key solution that can stand
alone or seamlessly integrate into an existing data infrastructure to quickly
recover from a cyber-attack. The Blockchain Archive Server is a server that
comes pre-loaded with the blockchain-powered cybersecurity software, which can
be delivered, installed, and integrated into a client's computer systems with
ease.
In December 2020, we made our second product offering-the Regional Service
Center-available on a limited test market basis. The Regional Service Center was
added to our standard product line effective January 1, 2021. A Regional Service
Center is a single unit system of 32 Blockchain Archive Servers capable of
servicing up to 2,580 individual small accounts, and is marketed to existing IT
service providers with established accounts. The Regional Service Center offers
small businesses the same state of the art technology previously available only
to large or very well-funded companies. Sollensys believes that smaller
companies, and even certain individuals, will find the Regional Service Center
affordable, paying only for the actual space they use.
20
Recent Developments
Rescission Agreement
As previously disclosed, pursuant to the Amended and Restated Merger Agreement
dated as of April 7, 2022 (the "Merger Agreement"), by and among S-CC Merger
Sub, Inc. ("S-CC Merger Sub"), a previously a wholly owned subsidiary of
Sollensys Corp ("Sollensys"); SSolutions Merger Sub, Inc., a previously a wholly
owned subsidiary of Sollensys ("S-Solutions Merger Sub"); SCARE Holdings, LLC, a
wholly owned subsidiary of Sollensys ("SCARE"); (iii) Celerit Corporation, a
wholly owned subsidiary of Sollensys ("Celerit"); (iv) Celerit Solutions
Corporation, a wholly owned subsidiary of Sollensys ("Celerit Solutions"); (v)
Terry Rothwell; and (vi) CRE Holdings, LLC ("CRE"), the parties to the Merger
Agreement undertook certain transactions, including the merger of Celerit with
and into S-CC Merger Sub, with Celerit surviving, and the merger of Celerit
Solutions with and into S-Solutions Merger Sub, with Celerit Solutions
surviving, in which transactions Ms. Rothwell received certain consideration as
set forth in the Merger Agreement, and in connection with which the parties
entered into certain other agreements and certain other transactions. Subsequent
to entry into the Merger Agreement, the parties determined that they would
unwind the transactions as set forth in the Merger Agreement and in the other
agreements entered into in connection therewith.
Accordingly, on August 22, 2022, the Company entered into the Rescission,
Termination and Release Agreement (the "Rescission Agreement") by and among (i)
the Company, (ii) SCARE; (iii) Celerit; (iv) Celerit Solutions; (v) Ms.
Rothwell; (vi) Ron Harmon; and (vii) CRE. Pursuant to the terms of the
Rescission Agreement, the parties agreed to unwind the transactions as set forth
in the Merger Agreement and in the other agreements entered into in connection
therewith, so as to place each of the parties to the Merger Agreement in the
position that they were as of immediately prior to the closing of the
transactions as set forth in and as contemplated by the Merger Agreement and the
related agreements. As a result, on August 26, 2022, the following agreements
were terminated, except as set forth in the Rescission Agreement: (i) the
Rothwell Employment Agreement, (ii) the Harmon Employment Agreement, (iii) the
Blockchain Archive Server Agreement, (iv) the Rothwell Note, (v) the Banking
Agreement, and (vi) the Real Estate Purchase Agreement.
Pursuant to the terms of the Rescission Agreement, among other things, the
parties agreed as follows:
(viii) Sollensys agreed to transfer to Ms. Rothwell one share of Celerit common
stock;
(ix) Sollensys agreed to transfer to Ms. Rothwell one share of Celerit Solutions
common stock;
(x) Ms. Rothwell agreed to transfer to Sollensys 4,000,000 shares of Sollensys
common stock;
(xi) Ms. Rothwell agreed to resign from any and all positions with Sollensys,
including as a member of Sollensys' board of directors;
(xii) Donald Beavers agreed to resign as a director and officer of Celerit and
Celerit Solutions;
(xiii) Anthony Nolte agreed to resign as a director and officer of Celerit and
Celerit Solutions; and
(xiv) Sollensys agreed, in connection with its withdrawal from Celerit of an
aggregate of $605,000 following the closing of the Merger Agreement, to
issue to Celerit a promissory note in the principal amount of $605,000,
accruing interest at the rate of 7% per annum and due on September 30, 2022
(the "Celerit Note").
In addition, pursuant to the terms of the Rescission Agreement, the parties
agreed to terminate:
(vii) The Executive Employment Agreement, dated as of April 7, 2022, by and
between Sollensys and Ms. Rothwell (the "Rothwell Employment Agreement"),
except as set forth in the Rescission Agreement;
(viii) The Executive Employment Agreement, dated as of April 7, 2022, by and
between Sollensys and Mr. Harmon (the "Harmon Employment Agreement"),
except as set forth in the Rescission Agreement;
21
(ix) The Rothwell Sollensys Blockchain Archive Server Distributive Data Center
Agreement (2 Units), dated as of April 7, 2022, by and among Sollensys, Ms.
Rothwell and George Benjamin Rothwell (the "Blockchain Archive Server
Agreement");
(x) The Promissory Note issued by Sollensys to Ms. Rothwell on April 7, 2022 (the
"Rothwell Note");
(xi) The Banking and Credit Union Services Agreement, dated as of April 7, 2022,
by and between Sollensys and Celerit (the "Banking Agreement");
(xii) The Real Estate Purchase Agreement, dated as of March 24, 2022, by and
among Sollensys, SCARE, CRE, Ms. Rothwell and Mr. Rothwell (the "Real
Estate Purchase Agreement").
Promissory Note
On August 22, 2022, Sollensys issued a Promissory Note, in the principal amount
of $605,000, to Celerit. The Celerit Note bears simple interest at a rate of 7%
per annum to the maturity date, September 30, 2022, or such earlier date as the
Celerit Note may be paid pursuant to the terms of the Celerit Note. There is no
penalty or premium for prepayment. In the Event of Default (as defined in the
Celerit Note), Celerit may, at its option, declare the entire indebtedness under
the Celerit Note immediately due and payable.
Board Resignations
Pursuant to the terms of the Rescission Agreement, effective August 22, 2022,
Ms. Rothwell resigned as a member of Sollensys' board of directors. Effective
August 23, 2022, Anthony Nolte resigned as a member of Sollensys' board of
directors. Ms. Rothwell's and Mr. Nolte's resignations are not because of a
disagreement with Sollensys on any matter relating to Sollensys' operations,
policies or practices.
We acquired Abstract Media, LLC ("Abstract Media") in December 2021. Abstract
Media was formed in October 2011 with the goal of improving user engagement
using visualization tools, and has evolved into an interactive media and
software development company to optimize effective corporate learning,
operational workflow and communication using technology in the augmented reality
or virtual reality space. Abstract Media conducts its operations from its office
location in Houston, Texas.
On November 4, 2022 the company sold 100% of its membership interest in Abstract
Media, LLC to Tech Edge Services for $1,000. Additional terms are as follows:
(a) The Parties acknowledge and agree that Abstract Media is currently the
lessee pursuant to a lease for the premises located at 33136 Magnolia Circle,
Suite F, Magnolia, Texas 77354 (the "Lease"). Following the Closing, the Seller
shall continue to pay the rent payable pursuant to the Lease for the months of
November 2022 and December 2022. Buyer shall thereafter be responsible for rent
payments in the Lease commencing on January 1, 2023.
(b) The Company shall pay, and shall be responsible for, all outstanding
liabilities of Abstract Media related to any and all contracts of Abstract Media
as of the Closing Date.
(c) Following the Closing and for a period of 24 months thereafter (the
"Earn-Out Period"), Buyer shall pay to the Company an amount equal to 5% of the
gross proceeds received by the Company with respect to contracts and agreements
in place with Abstract Media as of the Closing Date. Such payments shall be made
within 7 days of each calendar month during the Earn-Out Period.
Under the terms of the Membership Interest Purchase Agreement, the Company
determined that the goodwill and the unamortized value of intangible assets as
of September 30, 2022 had been fully impaired. As a result the Company recorded
an impairment charge of $344,787 on its Consolidated Statement of Operations for
the three months ended September 30, 2022
Results of Operations for the Three and Nine Months Ended September 30, 2022
Compared to the Three and Nine Months Ended September 30, 2021
The comparison of operating results includes the operations of Abstract Media in
the three and nine months ended September 30, 2022 compared to zero operating
results for Abstract Media in the same three and nine month periods in 2021. See
"-Overview-Recent Developments" regarding the unwinding of all of the Celerit
transactions. During the nine months ended September 30, 2022, Celerit generated
$7,245,182 in revenue and a pre-tax profit of $2,651,278. Additionally, as a
result of the Celerit unwinding we lost $14,649,778 upon rescission resulting in
a net loss of $11,998,500 from discontinued operations for the nine months ended
September 30, 2022. The results from discontinued operations are excluded from
management's discussion of operation below, and from the Liquidity analysis.
22
Revenue
For the three months ended September 30, 2022, we recorded $102,353 in revenue
at Sollensys from the execution of our blockchain archive server agreements and
due to addition of Abstract Media revenue, compared to $35,714 in revenue for
the three months ended September 30, 2021. We are in the process of developing
our strategic business plan going forward and, therefore, revenue may vary from
period to period.
For the nine months ended September 30, 2022, we recorded $890,576 in revenue
compared to $145,357 for the same period ended September 30, 2021. We are in the
process of developing our strategic business plan going forward and, therefore,
revenue may vary from period to period.
Cost of sales
Cost of sales was $190,048 for the three months ended September 30, 2022,
compared to cost of sales of $104,608 for the three months ended September 30,
2021. The significant increase in cost of sales is attributable to higher sales,
the buildout of our infrastructure in the prior period in anticipation of higher
sales levels in 2022, and the addition of Abstract Media's revenue and cost of
sales.
Cost of sales was $999,093 for the nine months ended September 30, 2022,
compared to cost of sales of $167,352 for the nine months ended September 30,
2021. The significant increase in cost of sales is attributable to higher sales,
the buildout of our infrastructure in the prior period in anticipation of higher
sales levels in 2022, and the addition of Abstract Media's revenue and cost of
sales.
Operating expenses
Operating expenses for the three months ended September 30, 2022 were $1,222,896
compared to $1,058,574 for the three months ended September 30, 2021. The
increase in operating expenses in the three months ended September 30, 2022,
compared to the same period in 2021 is indicative of an impairment charge to
goodwill and intangible assets of $344,787, offset by the Company's efforts to
reduce operating expenses going forward. There can be no assurance that the
Company can continue reducing expenses in the future.
Operating expenses for the nine months ended September 30, 2022 were $4,111,884
compared to $2,505,120 for the nine months ended September 30, 2021. The
significant increase in operating expenses in the nine months ended
September 30, 2022, compared to the same period in 2021 is due to the buildout
of the infrastructure at the Company in 2021 to support higher levels of
activity and revenue generation in 2022, the addition of Abstract Media's
operating expenses, and due to an impairment charge to goodwill and intangible
assets of $344,787. However, prospectively the Company is attempting to reduce
its level of operating expenses because its anticipated revenue ramp-up has not
occurred. There can be no assurance that the company can reduce expenses and
that the levels of revenue will increase in the future.
Key components of the Company's operating expenses for the nine months ended
September 30, 2022 include approximately $1,118,000 in legal and professional
fees, approximately $1,475,000 in payroll and benefits, approximately $135,000
in rent expense, approximately $503,000 in stock-based compensation for
services, approximately $143,000 in amortization of intangible assets and
depreciation, and approximately $54,000 in marketing expense.
Liquidity and Capital Resources
We had $5,288 in cash and cash equivalents on hand as of September 30, 2022.
As described throughout this Report, the Company entered into a rescission
agreement with Celerit on August 21, 2022. The analysis below of the Company's
liquidity excludes any discussion of the impact on cash flows from discontinued
operations.
Net cash used in operating activities for continuing operations was $2,953,008
for the nine months ended September 30, 2022, compared to $1,641,486 in cash
used for continuing operations for the nine months ended September 30, 2021. The
material increase in cash used in operating activities during the nine months
ended September 30, 2022 was primarily due to the decrease in profitability from
continuing operations of approximately $1,458,000 during the nine months ended
September 30, 2022.
Net cash used in investing activities from continuing operations during the nine
months ended September 30, 2022 was $18,469 compared to $408,691 cash used in
investing activities from continuing operations for the nine months ended
September 30, 2021. The decrease in cash used in investing activities during the
nine months ended September 30, 2022 was primarily due to the decrease in
capital expenditures during 2022, compared to cash used for building
improvements of $167,246 on Company's corporate headquarters, and cash used of
$241,445 for the purchase of furniture and equipment in the 2021 period.
23
Net cash provided by financing activities from continuing operations was
$2,603,481 for the nine months ended September 30, 2022, compared to $2,066,959
for the nine months ended September 30, 2021. The increase in cash provided
during the 2022 period was primarily due to an in increase in notes payable and
related party loans of approximately $2,149,000, plus proceeds from the sale of
common stock of approximately $510,000 in the 2022 period compared to $2,040,979
in the comparable 2021 period.
Since we have been incurring losses from operations, we have relied on ongoing
sales of unregistered securities and the personal guarantees of Mr. Beavers, our
Chief Executive Officer, a member of our Board of Directors and a significant
stockholder, to obtain financing to fund our operations.
There can be no assurance that we will be able to continue to raise capital from
the sale of our securities, or use our securities to make acquisitions.
Additionally, there can be no assurances that Mr. Beavers will continue to
provide his personal guaranty on financing transactions to help raise capital.
Plans to Address Liquidity Shortages
In order to address liquidity shortages, the Company has undertaken two
initiatives (i) the sale and leaseback of its corporate headquarters at a
significant profit, and the divestiture of Abstract Media which has generated
negative cash flow during 2022. See Note 12: Subsequent Events
Financial Impact of COVID-19
The COVID-19 pandemic has affected how we are operating our business, and the
duration and extent to which this will impact our future results of operations
and overall financial performance remains uncertain. The COVID-19 pandemic is
having widespread, rapidly evolving, and unpredictable impacts on global
society, economies, financial markets, and business practices. Federal, state
and foreign governments have implemented measures to contain the virus,
including social distancing, travel restrictions, border closures, limitations
on public gatherings, work from home, and closure of non-essential businesses.
To protect the health and well-being of our employees, partners, and third-party
service providers, we have implemented work-from-home requirements, made
substantial modifications to employee travel policies, and cancelled or shifted
marketing and other corporate events to virtual-only formats for the foreseeable
future. While we continue to monitor the situation and may adjust our current
policies as more information and public health guidance become available, such
precautionary measures could negatively affect our customer success efforts,
sales and marketing efforts, delay and lengthen our sales cycles, or create
operational or other challenges, any of which could harm our business and
results of operations. In addition, the COVID-19 pandemic has disrupted the
operations of our current enterprise customers, as well as many potential
enterprise customers, and may continue to disrupt their operations, for an
indefinite period of time, including as a result of travel restrictions and/or
business shutdowns, uncertainty in the financial markets, or other harm to their
businesses and financial results, resulting in delayed purchasing decisions,
extended payment terms, and postponed or cancelled projects, all of which could
negatively impact our business and results of operations, including our revenue
and cash flows.
Beginning in March 2020, the U.S. and global economies have reacted negatively
in response to worldwide concerns due to the economic impacts of
the COVID-19 pandemic. These factors also may adversely impact enterprise and
government spending on technology as well as such customers' ability to pay for
our products and services on an ongoing basis. For example, some businesses in
industries particularly impacted by the COVID-19 pandemic, such as travel,
hospitality, retail, and oil and gas, have significantly cut or eliminated
capital expenditures. A prolonged economic downturn could adversely affect
technology spending, demand for our offerings, which could have a negative
impact on our financial condition, results of operations and cash flows. Any
resulting instability in the financial markets could also adversely affect the
value of our common stock, our ability to refinance our indebtedness, and our
access to capital.
The ultimate duration and extent of the impact from the COVID-19 pandemic
depends on future developments that cannot be accurately forecasted at this
time, such as the severity and transmission rate of the disease, the actions of
governments, businesses and individuals in response to the pandemic, the extent
and effectiveness of containment actions, the impact on economic activity and
the impact of these and other factors on our employees, partners, and
third-party service providers. These uncertainties may increase variability in
our future results of operations and adversely impact our ability to accurately
forecast changes in our business performance and financial condition in future
periods. If we are not able to respond to and manage the impact of such events
effectively or if global economic conditions do not improve, or deteriorate
further, our business, financial condition, results of operations, and cash
flows could be adversely affected.
24
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
We believe that the following critical policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which
establishes a new lease accounting model for lessees. The updated guidance
requires an entity to recognize assets and liabilities arising from financing
and operating leases, along with additional qualitative and quantitative
disclosures. The amended guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018, with early
adoption permitted. In March 2019, the FASB issued ASU 2019-01, Codification
Improvements, which clarifies certain aspects of the new lease standard. The
FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases in July
2018. Also in 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted
Improvements, which provides an optional transition method whereby the new lease
standard is applied at the adoption date and recognized as an adjustment to
retained earnings. The amendments have the same effective date and transition
requirements as the new lease standard On November 15, 2019, the FASB issued ASU
2019-10, which amends the effective dates for three major accounting standards.
The ASU defers the effective dates for the credit losses, derivatives, and lease
standards for certain companies. Since the Company is classified as a small
reporting company, emerging growth company, and has a calendar-year end the
Company was eligible for deferring the adoption of ASC 842 to January 1, 2022.
In the first quarter of fiscal 2022, we adopted ASU 2016-02 using the
"Comparatives Under 840 Option" approach to transition. Under this method,
financial information related to periods prior to adoption will be as originally
reported under the previous standard - ASC 840, Leases. The effects of adopting
the new standard (ASC 842, Leases) in fiscal 2022 were recognized as a
cumulative-effect adjustment to retained earnings as of the beginning of the
fiscal first quarter. We elected the package of practical expedients permitted
under the transition guidance within the new standard, which among other things,
allows us to carry forward the historical lease classification as operating or
capital leases. We also elected to combine lease and non-lease components and to
exclude short-term leases from our consolidated balance sheets.
The most significant impact of adoption was the recognition of operating lease
assets and operating lease liabilities of $496 thousand and $541 thousand,
respectively. The cumulative impact of these changes increased accumulated
deficit by $46 thousand. We expect the impact of adoption to be immaterial to
our consolidated statements of earnings and consolidated statements of cash
flows on an ongoing basis. As part of our adoption, we also modified our control
procedures and processes, none of which materially affected our internal control
over financial reporting. See Note 10, Leases, for additional information
regarding our accounting policy for leases and additional disclosures.
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